Material Adverse Effect (“MAE”) clauses are almost always included in loan agreements. Their purpose is to act as a “sweeper” to allow the lender to take action when the lender feels its position has been prejudiced in a way which is not otherwise provided for in the loan agreement.
A standard loan agreement will include an MAE specific event of default clause. Similarly, Material Adverse Change (“MAC”) clauses are intended to protect the lender in cases where there is change in events or circumstances.
The concept of Material Adverse Change appears, as standard, in certain of the representations made by the borrower to a lender within a loan agreement.
If a lender can prove a breach of an MAE / MAC clause, this will typically entitle the lender to:
- cancel any further commitment to advance funds (a so called “drawstop”);
- declare that all amounts owing be immediately due and payable;
- declare that all loans become payable on demand;
- exercise its rights to recover all amounts owing, including the enforcement of its security (if any); and/or
- charge default interest on any indebtedness owing.
Download our publication Will COVID-19 constitute a material adverse effect and/or material adverse change under existing loan arrangements?, which looks at the prospect of lenders relying on Material Adverse Effect and/or Material Adverse Change provisions in existing loan arrangements to accelerate loans and/or enforce security.
Our banking & finance experts can advise on the terms of your existing loan arrangements, and assist you with any measures required to see your business through these difficult times.
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